Chapter 11. Tools for Restructuring the Economy: Introduction

In Chapter 1, I cited Øystein Dahle's warning that the failure of prices to tell the ecological truth could undermine capitalism, just as the failure of prices to tell the economic truth undermined socialism. The Chinese recognized this risk of prices not telling the ecological truth when they banned tree cutting in the Yangtze river basin following the near-record flooding in 1998. They said that a tree standing was worth three times as much as a tree cut. If they had included not only the flood control value of trees but also the value in recycling rainfall to the country's interior, a tree standing might easily be worth six times as much as a tree cut.1

The use of a highly valued resource such as a tree for a lowly valued purpose such as lumber imposes an economic cost on society. Similarly, since the price of a gallon of gasoline does not include the cost of climate change, it too imposes a cost on society. If losses such as these, now occurring on an ever larger scale, keep accumulating, the resulting economic stresses could bankrupt some countries.

The key to sustaining economic progress is getting prices to tell the ecological truth. Ecologists and economists—working together—can calculate the ecological costs of various economic activities. These costs can then be incorporated into the market price of a product or service in the form of a tax. Additional taxes on goods and services can be offset by a reduction in income taxes. The issue in "tax shifting," as the Europeans call it, is not the level of taxes but what they tax.

There are several policy instruments that can be used to restructure the economy, including fiscal policy, government regulation, eco-labeling, and tradable permits. But restructuring the tax system is the key to eliminating the crippling economic distortions. Tax policy is particularly effective because it is systemic in nature. If taxes raise the price of fossil fuels to reflect the full cost of their use, this will permeate the economy, affecting all energy-related economic decisions.

Today's fiscal systems, a combination of subsidies and taxes, reflect the goals of another era—a time when it was in the interest of countries to exploit their natural resources as rapidly and competitively as possible. That age has ended. Now natural capital is the scarce resource. The goal is to restructure the fiscal system so that the prices reflect the truth, protecting the economy's natural supports.

It is not easy to grasp the scale and urgency of the needed restructuring. Reestablishing a stable, sustainable relationship between the global economy and the earth's ecosystem depends on restructuring the economy at a pace that historically has occurred only in wartime. When national security is threatened, governments take extreme measures, such as drafting able-bodied men into the armed forces, commandeering natural resources, and sometimes even taking over strategic industries. Although it may not yet be obvious to everyone, we may well be facing a threat that is comparable in scale and urgency to a world war.